Bond Report: 10-year Treasury yield falls most in three weeks as Trump draws attention to U.S.-China tensions

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U.S. Treasury yields fell Friday after President Donald Trump railed against China in a news conference, but refrained from revisiting the U.S-China trade deal signed in January, preferring instead to focus on the special relationship with Hong Kong.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, 0.655% fell 5.3 basis points to 0.650%, marking its biggest single-day drop in around three weeks. The benchmark maturity was down around a basis point this week, but up 3.1 basis points this month.

The 2-year note rate TMUBMUSD02Y, 0.160% edged 2 basis points down to 0.156%, leaving it down 1.2 basis points for the week. For the month, the short-dated fell 3 basis points. The 30-year bond yield TMUBMUSD30Y, 1.411% slipped 6.4 basis points to 1.407%, trimming its weeklong rise to 3.4 basis points. The long bond gained 14 basis points in May.

See: Foreigners desperate for dollars contributed to Treasury market seizure in March, say analysts

What’s driving Treasurys?

The bond-market took on a bullish tone as Trump’s news conference put pressure on Chinaover the imposition of security laws that would erode Hong Kong’s autonomy from Beijing.

The President announced sanctions against Chinese officials who were endangering Hong Kong’s relative independence from China and said he would cut ties with the World Health Organization.

Read: Trump says U.S. will move to sanction Chinese officials over ‘smothering’ Hong Kong — but makes no mention of phase-one trade deal

At the same time, some investors noted his measures were less harsh than feared. Trump did not mention terminating the phase one U.S.-China trade deal nor did he mention sanctions against Chinese financial institutions. He also said he would “study” the practices of Chinese companies listed on U.S. exchanges, easing fears that he would move to delist such firms.

Check out: Revoking Hong Kong’s special status is Trump’s ‘nuclear option’ that could trigger irrevocable U.S.-China split, analysts warn

The bond-market rally on Friday may also have reflected buying from money managers who needed to scoop up long-dated debt to ensure the average maturity of their portfolios matched that of their competing benchmark indexes. As debt is constantly maturing, bond portfolios tend to see their maturities fall over time unless new securities are bought.

See: U.K., Australia and Canada join Trump administration in condemning Chinese national security law for Hong Kong

In U.S. economic data, personal income in April rose 10.5%, but consumer spending dropped 13.6%, reflecting how households curbed their spending due to lockdown measures and benefited from unemployment insurance payments.

Meanwhile, the trade deficit for goods widened by $69.7 billion last month. And the University of Michigan’s consumer sentiment index for May came in at 72.3, marginally higher than 71.8.

What did market participants’ say?

“It suggest further downside risks to a coordinated global recovery. It seems very much this is another step to the de-globalization of modern supply chains,” said Jon Hill, interest-rate strategist at BMO Capital Markets, in an interview.

He noticed, however, Trumps announced measures constituted an “extremely mild response. It’s a lot less consequential than sanctions against Chinese banks or more aggressive policy responses that they might have rolled out.”

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